If you buy into the SiliconValley(opens in new tab) cliché, startupexpenses boildown to a team of coders with gaming laptops,some cloud infrastructure, workspace in a hip incubator and an endless supply of Red Bull,all paid for by TechCrunch Disrupt(opens in newtab)prize money.
In the real world, there’s a bit more to it.
In robust economic times, startups can often get enough VC funding to launch a business instyle without any plan on how they’ll become profitable. Those days are over, for nowanyway. Profitability is the new metric, and as any B-school grad knows, strong unit margins depend onkeeping a lid on costs right from the start.
For a startup, spending freely while relying on sales to keep your business in the black isa risky strategy. You need to scrutinize all spending—costs to establish your company,services, inventory, payroll, equipment, marketing, software, legal fees, even whether tohire a controller—then prioritize, document and continually assess.
What are Small Business Startup Costs?
Many new businesses, excited by their big ideas, neglect the careful planning and meticulousaccounting needed to manageexpenses. They rely instead on an expected flood of customers to keep operationsafloat—sometimes with abysmal results, judging from small-businesssurvival statistics.
You do need a plan, but you don’t need to start from scratch. The U.S. Small Business Administration provides templates(opens in new tab) tailored tothree startup categories: brick-and-mortar businesses, online businesses and serviceproviders. We also provide a template, below.
You’ll face different startup expenses depending on your business type, though mostcompanies will need some equipment and supplies, communications andcollaboration technologies, licenses and permits, professional services such as alawyer and for-hire bookkeeper or accountant,advertising and marketing, and a website to reach customers.
Key Takeaways
- Estimating both one-time and ongoing costs ensures your business has enough capital tosustain itself for a period of time without completely relying on sales.
- Document, document, document: To get a loan, you’ll need copies of agreements withkeysuppliers and clients, a projection of expected income and costs and more. So keeprecords.
- Typical small-business startup expenses include research, licensing fees, payroll,insurance and rent.
Small Business Startup Expenses Explained
Startup costs are the expenses needed to launch a new business. Some, like costs to qualifyto get into a type of industry or business, such as getting a license to practice law orsell real estate, aren’t deductible. But you can deduct $5,000 in startup costs and $5,000 in organizational costs(opens in new tab) in thefirst year of business as long as your total costs are $50,000 or less; if you spend more,you’ll need to amortize those costs.
Good to go:
- Legal, brokerage, accounting, appraisal and similar costs incurred to acquire a capitalasset
- Customer surveys and other market research expenses
- Site selection costs when choosing a physical location
- Incorporation and partnership filing fees
- Salaries and wages for employees who are being trained and their instructors.
Don’t try it:
- Deductible interest and taxes, such as real estate
- If you’re setting up a partnership, related costs, such as a broker, registrationandlegal fees and printing costs
- Any costs incurred after you get the business up and running. At that point,you need to switch from startup to small-business deductions
As the SBA points out in its SMB guide, different businesses will have different types ofexpenses—a professional services firm may want offices, while an ecommerce store needswarehouse space.
However, there are a few types of expenses that are common for most types of businesses.What’s important to know is whether the IRS considers a cost a capital expense—thatis, anasset, like machinery, office furniture or company vehicles, that’s carried onthebalance sheet and depreciated over a set period of time.
Classification is important when looking to reduce business taxes because capital purchasesare typically amortized or depreciated meaning the expense is spread out over several years.
It’s also crucial to determine a launch date for your business. From there, figure outthetime period during which you can deduct startup costs. In most cases, you can go back as faras one year from your business’ startup date.
Why Calculate Startup Costs?
Calculating startup costs gives you a snapshot of the costs to launch and fund your business.How much do you need for one-off expenses, such as furniture? That shows how much capitalyou need for your business to open its doors.
Understanding recurring or ongoing expenses, such as payroll and cost of goods sold (COGs), helpsyou analyze your cash flow needs, soyou know how much business revenue you need to at least break even. It also makes it easierfor you to set aside enough money—say, six months’ worth of ongoingexpenses—so you’re notheavily dependent on business revenue right away, or at least until you’re past theearlystages.
Importance of Outlining Startup Costs in Your Business Plan
While venture capital has dominated headlines in the business press, very few companiespursue that financing route: In 2019, the VC industry spent $136 billion to fund just 11,000U.S. companies. Many more businesses rely on credit cards, loans and lines of credit to fundtheir startup costs.
But whatever route you take, you must know approximately how much you’ll need before seeking outside funding. Thedocumentation required for most loans includes copies of agreements with key suppliers andclients along with a detailed one-year projection of expected income and costs, with anarrative on how you expect to make those numbers match up.
10 Common Small Business Startup Expenses
Though the list below is divided into one-time and ongoing startup expenses, you’llnoticesome of them overlap. What’s important is being thorough and honest about yourexpectations.
One-time expenses
Research expenses: A business plan provides an overview and a map ofyour new business. It will force you to consider costs and different strategies toensure your business’ longevity. This includes carefully researching theindustryyou’re in, your target market and the best taxstructure for you. If you’re hiring a market research firm, thisexpenseneeds to be put in your business plan.
Borrowing costs and raising funds: Financing can be in the form ofequity (such as issuing stock) or debt (such as a bond). Most small-businessowners take on debt from banks or the Small Business Administration (SBA). Dependingon the financial institution, you may need to pay an initial fee, such as anapplication or origination fee. Of course, there will be ongoing costs in the formof principal and interest payments.
License and permit fees: Depending on the nature of your business,you may need to obtain authorizations and inspections to get your business licenseor permit. Some industry-specific permits may cost more than others. You’llalsoneed to factor in filing articles of incorporation or articles of organization,depending on state guidelines.
Equipment and supplies: All businesses need some type of suppliesand equipment. These costs may be one-time or ongoing, depending on whether you makea purchase outright or decide to lease.
Ongoing Expenses
Marketing: Advertising and promotion aren’t only for the earlystages. You’ll need to develop and implement a marketing plan that should befactored into ongoing costs. And, don’t neglect a PRstrategy, which can increase brand visibility and build trust with thepublic.
Payroll and benefits: The cost of humanresources includes wages, salaries, commissions, bonuses, stipends and anyemployee benefits you have. Planning on fair compensation ensures lower turnover andattracts talent to your organization. This cost can also include contractors ifyou’re not hiring employees.
Insurance: Business insurance can include workers’compensation andshort-term disability. Experts warn to becareful of overspending here. Also consider insurance to protect yourcustomers as well as your personal assets from any business-related legalliabilities. Insurance can either be an annual or monthly cost.
Utilities: Water, electricity, internet and phone bills are commoncosts for brick-and-mortar businesses. These costs can also apply to home officespaces, but you can’t deduct all your utilities.
Technology: Technological expenses include the cost of a website,information systems and business software, including accounting and payrollsoftware. Some small-business owners choose to outsource these functions to managed IT serviceproviders or virtual CFOs oraccountants to save on payroll and benefits, while others choose to purchasesoftware-as-a-service (SaaS).
Inventory: Businesses such as those in the retail, restaurant andmanufacturing sectors may need to purchase initialinventory to start and budget for ongoing operations. You must carefullycalculate to ensure there is enough inventory to operate, but not so much thatyou’re stuck with items that aren’t necessary or may spoil. Theimportance of good inventorymanagement is hard to overstate.
How to Calculate the Cost of Starting a Business
Calculating your small-business startup costs can help attract investors and estimate whenyou’ll start making a profit. Below are the basic steps to get started.
- Create a list of necessary expenses. This includes one-time and ongoingcosts.
- Research estimated costs. Get as close as you can to the real cost ofeach item on your list. Your research should include comparing different vendors to helpyou minimize expenses without sacrificing quality. Depending on your business, researchcan include equipment leases, rent, office supplies and contractor salaries.
- Total up expense amounts. Add up your one-time expenses. Then, look athow much your ongoing expenses will cost for one month and multiply that figure byseveral months to calculate your initial total startup amount. How many is“several”?That depends on when you realistically expect to see revenue or additionalfunding.
- Add a cushion. A six- to 12-month cushion will help you keep youroperations going, since it is difficult to forecast sales accurately to start.
- Tally up the final amount. Add the cushion amount to your initialestimates to arrive at the final number.
Free Startup Costs Worksheet
Download this free worksheet(opens in newtab) to help you calculate your startupcosts.
Using Expense Management Software to Track Startup Expenses
Calculating small-business startup expenses will be a much more streamlined process when youuseexpense managementsoftware.Software also helps to automate the expensereporting process, so you can see right away how much of your funding goes to payingfor reimbursable operating expenses.
Plus, if you work with others on a team, having a single source of data that syncs inreal-time makes collaboration easier. It also helps you to document your expenses easily fortax reporting and auditing.
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Small Business Startup Expense FAQs
What are examples of startup costs?
Examples of startup costs include licensing and permits, insurance, office supplies, payroll,marketing costs, research expenses, and utilities.
What is the average startup cost for a small business?
Since businesses and industries have different requirements, costs depend on variables suchas whether you need office or warehouse space, physical inventory and licensing.That’s why it’s crucial to estimate costs, such as expenses you'll incur beforeyourbusiness officially opens, assets aside from cash and a cushion in the event of operatingdeficits during the early stages.
